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ResMed Increases Market Dominance

Australia | Oct 29 2018

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

ResMed has impressed with solid revenue growth across all divisions in the September quarter, while an expanding digital platform is driving re-supply and improving adherence to the company's products.

-Continuing to dominate US with investment in Brightree, connected care
-Building on early success with improving software base
-Are strong expectations already factored into the stock?

 

By Eva Brocklehurst

ResMed ((RMD)) is in solid position after a strong September quarter. Brokers were impressed by revenue growth across all the company's divisions, and expansion into new markets. Earnings are supported by growing awareness of Obstructive Sleep Apnea (OSA) while an expanding digital platform is driving resupply, lower set-up costs and improved adherence to the company's products.

September quarter results were up 28%, despite cycling a tough comparable quarter. Both ResMed and competitors reported double-digit growth in US masks in the first quarter, suggesting the market is growing ahead of historical rates.

Ord Minnett believes the company is building an unassailable lead in OSA and its dominance of the US market is an endorsement of the investment in Brightree and connected care, which provides for similar opportunities in other markets. The broker is confident ResMed has fully recovered its position as the leading mask company after five quarters of double-digit growth. This is attributed to the F20 range that has re-established its top position.

Morgan Stanley also envisages robust top-line growth continuing because of the large installed base of AirSense masks and stable reimbursement framework in the US. The broker expects less gross margin pressure versus the past five years because of a softer US competitive bidding stance and potential upside from the Mobi portable oxygen generator.

Gross margins are expected to improve to 58.5% in FY19, from 58.2% in FY18. That said, Morgan Stanley still expects margins to weaken over the next ten years, just not as sharply.

Cloud-based connectivity is underpinning an expanding masks/devices portfolio as well as automated re-supply. Acquisition opportunities also exist across the world while management has signalled a comprehensive move into home and hospice care.

Despite the attractive outlook, Ord Minnett remains cautious, believing the expectations are largely factored into the share price, particularly in an environment where high PE (price/earnings ratio) stocks are under pressure. ResMed is still trading at a 60% premium in PE terms to the S&P500 index, well above historical averages of 30%.

Connected Care

ResMed's devices are increasingly becoming a default choice for US durable medical equipment users as the company has built on early success with the connected care strategy, Ord Minnett asserts, and by offering a constantly improving software base.

Credit Suisse agrees the strength in flow generators stems from the connected care strategy and data capabilities of ResMed's AirView and Brightree platforms. Access to data increases the compliance rate of the installed base as well as the penetration rate within the sleep and COPD (chronic obstructive pulmonary disease) markets. This allows ResMed to gain greater share.

The broker expects continued strength in the device growth in FY19 as more home health care providers leverage the data analytics to improve the quality of care. Credit Suisse upgrades to Outperform from Neutral although remains cautious regarding competitors taking share with new product launches.

Mobi

UBS believes the formal launch of the Mobi portable oxygen concentrator, expected in the third quarter of FY19, will present a sizeable revenue opportunity, dependent on its performance relative to incumbent devices. Wilsons, too, likes the growth in non-invasive ventilation and the potential of the Mobi device. The broker, not one of the eight monitored daily on the FNArena database, maintains a Buy rating and $16 target.

Macquarie increases growth assumptions for the near term but wants evidence of the sustainability of trends before materially adjusting long-term forecasts and also awaits more detail on product specifications for Mobi in order to compare with existing products.

While the first quarter may have been strong, Citi believes the valuation already reflects sustainable top-line prospects and operating leverage. That said, the broker had previously expected mask growth to decelerate closer to market growth rates beyond the second half of FY19, but now believes it may be possible for ResMed to grow faster than the market for longer.

As a result of the recent launch of the F30 Airfit and no sign of a new mask from competitor Fisher & Paykel Healthcare ((FPH)), the broker expects the company to take market share over the rest of FY19.

Litigation

The Munich Regional Court has ruled that the headgear from two of Fisher & Paykel Healthcare's masks infringed one of ResMed's patents. The decision may be appealed and will not affect the sale of the said masks. F&P Healthcare has appealed the decision by the European Patent Office regarding the validity of the infringement claims and, if successful, that appeal will invalidate the Munich Regional Court ruling.

Citi believes F&P Healthcare is likely to continue losing market share in OSA masks at the expense of ResMed and Philips, although new masks to be launched in the coming 12 months should enable the recovery of some lost share.

FNArena's database has four Buy ratings, three Hold and one Sell (Macquarie). The consensus target is $15.08, suggesting 2.9% upside to the last share price. This compares with $14.66 ahead of the update. The targets range from $13.50 (Macquarie) to $16.40 (Morgans).

See also, Expanded Product Offering Underpins ResMed on August 6, 2018.

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